Traditional Financial Institutions vs Crowdfunding Platforms

Thanks to the rise of crowdfunding and peer-to-peer loans, banks and traditional financial institutions are no longer the only options for credit seekers. If you are looking to secure a loan for your business, this is great news. You have more choices now. You can easily find a loan most suitable for your needs.


Thanks to the rise of crowdfunding and peer-to-peer loans, banks and traditional financial institutions are no longer the only options for credit seekers. If you are looking to secure a loan for your business, this is great news. You have more choices now. You can easily find a loan most suitable for your needs.

Below, we have written up the advantages and the differences between taking out a loan from a traditional financial institution and borrowing from a crowdfunding platform. But we’d caution you against thinking one type of loan is better than the other. There is no “best” loan option – only a loan that is best for you and your credit needs.

 

Traditional Financial Institutions

When we talk about traditional financial institutions, we are usually talking about the banking system. Indeed, in this section, we will mainly talk about the advantages and disadvantages of bank loans.

Banks tend to offer long-term, high-amount loans. If your SME is in the process of scaling up and you need a vast sum for growth and expansion, you might need more than what a crowdfunding platform can offer. You should look at the maximum loan amount you can request from both banks and crowdfunding platforms.

Bank loans come in two forms: secured and unsecured. In a secured loan, you need to provide valuable assets, such as house or land, as collateral. Banks use collateral as assets they can seize if one day you are found unable to pay back your bank obligations. Unsecured bank loans require no collateral, but they are often reserved for those with pristine credit ratings.

One of the disadvantages of applying for a bank loan is the long, drawn-out process. Depending on amount, banks can take more than a few weeks to process a loan application and disburse funds. Some people find that having a solid history with the lending bank and having good assets to offer as collateral can ease the process, but going through a lengthy and dreary process is the norm.

To file a bank loan application, you may be asked to submit a myriad of documents and financial statements. Depending on your loan type, you may need to submit all these documents: a business plan, a personal budget planner, a personal asset statement, proof of business finances (in the form of up to date financial accounts and statements), cash-flow forecasts, and even a cost breakdown to show the bank you have correctly determined how much you need to borrow.

There is an obvious issue: plenty of SMEs don’t have suitable collateral or complete financial statements. If this is true of your SME, you may need to look elsewhere to secure credit.

 

Crowdfunding and Peer-to-Peer Lending Platforms 

Structurally, a crowdfunding loan or peer-to-peer loan tends to be smaller and shorter-term. It may be the type of loan for a small to medium-sized business in need of a cash flow fix or working capital.

In a crowdfunding or peer-to-peer lending platform, investors compete with each other to give you money. In this system, you run the risk (albeit small) of disinterested investors. There are occasions when a borrower may not get the amount of money he requested because not enough investors funneled funds into the loan.

A great advantage of crowdfunding platforms is the quick and easy process, usually entirely online. Crowdfunding and peer-to-peer lending platforms often promise several days between application and disbursement.

Requirement for documents varies for each loan applicant. Sometimes a platform will ask for more, sometimes for less. Generally, crowdfunding platforms are more flexible in the assessment criteria, looking at more than just the hard data in financial statements. Crowdfunding platforms also look at an applicant’s new projects, staff morale, director’s background, and the economic situation.

Crowdfunding loans are unsecured, which helps younger companies as they tend not to have suitable assets for collateral but most reputable crowdfunding and peer-to-peer lending platforms still ask for a personal guarantee.

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There is no neat conclusion to be made from the comparison above. It all depends on you and your needs. If you can’t fathom not interacting with a teller in a physical setting, or if your credit needs are big and long-term, it’s very likely you need to go through a bank. But if you are a growing company in need of funds to sustain the growth trajectory of your business, or a mature business in need of access to quick capital to secure that next big project, it’s better to go through a crowdfunding platform.




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